One’s first impression upon visiting a Chinese Ikea outlet is of the crowd: Examining the model kitchens, taking measurements of couches, lining up for Swedish meatballs at the cafeteria.
But Paul French, chief China representative of market research firm Access Asia and a regular contributor to CHINA ECONOMIC REVIEW, believes the real story is at the cash register. “I only care if there’s a big queue at the till.The Ikea here in Shanghai is the only one in the world that I know of where you could go to on a Saturday, buy six wine glasses and not have to queue up,” he said.
Ikea currently operates six stores in China and French said the firm’s slow expansion in China is evidence of its struggle in making sales on the mainland.
“If they’d gone gangbusters in Beijing and Shanghai, there’d be 50 Ikeas around the country by now,” French said.
Rising home ownership levels in China have created a burgeoning industry for home improvement and home decoration firms. Consultancy A.T. Kearney estimates that China’s home improvement and decoration market was worth around US$19 billion in 2007, up from just US$5 billion in 2001. Urban regions accounted for 75% of the sales last year.
But the fragmented nature of the industry presents a bevy of challenges to big box firms, both foreign and domestic, as the majority of sales for home decoration materials occur at small “mom and pop” retailers.
B&Q is usually identified as the leader of the pack among national players. The firm began operations in China 1999 and as of 2006 had expanded to 58 stores in 25 cities. But analysts say that even this industry-leading chain is small potatoes when compared to the legion of small independent retailers in the space.
Furthermore, foreign companies trying to get a foothold in the market are at a disadvantage to their smaller peers.
“The traditional small stores have their ways of evading value-added tax and all sorts of other taxes, so it becomes extremely difficult for properly run foreign retailers to go against these players,” according to Vincent Lui, who covers the retail sector for the Boston Consulting Group in Hong Kong.
Lui said that opportunities exist for big box home improvement retailers to differentiate themselves with return policies or convenience, but that it’s going to be an uphill battle.